Don't Blame Sliding Sterling on the Referendum
My prophecy department has suggested that I should write about the fall in the Pound Sterling. I feel very much entitled to do so as have been standing on the platform with my watch in my hand, drumming my fingers and waiting for this particular long-expected event to come steaming in, for some time now.
Rather more than three years ago, I wrote the following:
‘..One of the things which constantly strikes me about modern Britain is that there must be many people who would actually quietly like to see the collapse , or at least the shrinkage, of the currency. They cannot hope to pay off their debts in any other way .The same is true of the government, which has no idea how it will manage its deficit, and borrows more each day, an action no less stupid than Weimar Germany’s incessant printing of worthless money. How convenient a large inflation would be for them.
‘Could anyone do such a thing deliberately? Possibly. The book (‘When Money Dies’, which I was reviewing at the time) quotes but does not endorse suggestions that both the Bolsheviks and some of the Warsaw Pact states deliberately used hyperinflation to destroy the hierarchies, the certainties and the middle classes which stood in their way. I have seen no proof of this, but it is not incredible, and we all know John Maynard Keynes’s attribution to Lenin of the (justified) belief that if you wish to destroy a nation, you first debauch its currency. It is also a very good way of destroying the power and influence of the independent middle class, who are the mainstay of any truly free and law-governed society, and the reliable regiments of conservatism.
‘But of course those who are in charge of all these things are not Bolsheviks.
‘They are ordinary politicians, far too stupid to be so well-organised or directed. It is just an accident, a bungle, an unintended consequence by people too dim and short-sighted to understand that bills have, in the end, to be paid somehow. I am not sure whether that makes it any better, though. The results will still be very bad.’
For full article see http://hitchensblog.mailonsunday.co.uk/2013/05/when-money-dies-the-horrors-of-inflation.html
…
And also this :’ It looks to me as if the government has now decided to inflate its way out of the crisis. The new Governor of the ‘independent’ Bank of England has been given the nod that he may carry on with more ‘quantitative easing’, and the Budget seems to be offering help with mortgages to people who can’t really afford mortgages, which will create a new bubble of unrepayable borrowed money, possibly in return for a short-term boost to the economy. Everyone knows this is a bad idea, after what happened in the USA when they lent mortgages to people who couldn’t repay them. It is not even a kindness. Why do they do it?
It’s all pretty desperate, as one might expect from a government which never had any ideas in the first place. As far as I can find out , Vladimir Ilyich Lenin didn’t actually say ‘The surest way to destroy a nation is to debauch its currency’. Maynard Keynes rather hesitantly attributed it to the old monster. But it’s true, whoever said it. Since Gold-backed currencies gave way to paper, man has had to have faith in banknotes – so much faith that perhaps he hasn’t had the strength to have faith at the same time in God, who is considerably more credible than the average Cabinet or Central Bank.
He has to believe absolutely that the pretty blue, green or pink beer-token in his wallet is worth the goods which he purchases with it, and so does the shopkeeper who accepts it in return for those goods. He has to believe with all his heart that the columns of figures in his bank account stand for real value, along with the price he thinks he can get for his house if he sells it.
Once he ceases to do so, then money dies.
For full article see here http://hitchensblog.mailonsunday.co.uk/2013/03/inflation-the-gods-of-the-copybook-headings-speak.html
Well, this is coming to pass, and it is most provoking to be told that it is ‘caused’ by the referendum vote to leave the EU. No doubt this event was the trigger for the rapid slide of Sterling. But that was because the markets were waiting for such a trigger, and no doubt a lot of currency dealers, by gambling on a ‘Leave’ vote, did well in the money markets by betting on a post-referendum drop.
Sop now it has become established wisdom, and it may even be that, because the media are used by the markets to bring about little jumps and falls in the ratings of stocks or currencies, we will now see a constant link between the two, with each stumble and shudder along the road to exit being followed or accompanied by a lurch in the currency.
But this is correlation, not causation. Those with savings have known for years that inflation has been eating into their carefully hoarded stores of wealth, pensions included, thanks to the virtual abolition of interest and the repeated raids on pension schemes by Labour and Tory chancellors, which have nearly killed off what was once quite a solid sector of the economy, and left a lot of people wondering if they’ll die before the money runs out, or the other way round. . The message from investment advisers has been ‘put your money in something risky if you want to earn anything’. The old idea, that you could make a steady if modest income by just leaving the money on a reasonably safe deposit, is gone, I think for good.
But now those without savings, those living from hand-to-mouth and those (almost everyone under 60) with non-mortgage debts, must experience it too. For them it is a much more mixed experience. Their debts will visibly shrink, which they (and the government, whose debts will also shrivel visibly) will enjoy. But a lot of prices will rise, because we now import so much, and foreign holidays, which so many now regard almost as a right, will become swiftly costlier (perhaps it is time for British holidaymakers to sample the cheaper joys of the Crimea) . Our few export industries will be delighted. Those which rely on imported goods for their raw materials and fuel will not be. My guess, on the basis of what I think I know about our economy, is that a lower pound will hurt us more than it helps us.
Having experienced Harold Wilson’s famous 1967 devaluation (from $2-80 to £2-40) I am trained to laugh at political claims that it won’t hurt the money in your pocket. But in those days the government took direct responsibility for it, and was blamed for it. I wasn’t born in September 1949, when the Attlee government devalued from $4-03 to $2-80, it was a much more savage loss. But the country was well aware ( as it isn’t now) that it had run out of money and credit, and the humiliation just had to be absorbed. Fear of an even more humiliating repeat forced the Tories to abandon the Suez adventure seven years later.
Almost exactly 18 years before, in September 1931, Britain had come off the Gold Standard, Winston Churchill’s disastrous equivalent to the ERM crisis, unsustainable because we were broke and in debt, which we had not been in 1914 when he had helped get us into the Great War that ruined us financially. At that time the Pound sold for $4-87, roughly the same as the just under Five Dollars standard before 1914 (it is amusing to recall that transatlantic travellers reckoned in those days that the old English shilling was the exact equivalent of the American Quarter, which it also closely resembled in size and weight). During the US Civil War, in 1864, the Pound brought in almost ten dollars, peaking at $9-97. That’s war for you, so it is surprising that during World War One, while Britain was piling up a huge unrepayable (and still unrepaid) debt to the USA, the rate did not sink below $4-76, and fell only to $4-43 when hostilities ended, reaching $3-66 in 1920 before being dragged up again by the return to the Gold Standard.
During the 1930s the dollar-pound rate fluctuated between about 3-15 to above 5-00, but in 1940 was fixed at just above four dollars for the rest of the war.
These figures, like the old rate between Sterling and the abolished Deutschemark, always seem to me to give a true idea of how we were really doing against comparable economies in these periods. The answer is, increasingly badly. But the current account deficit, not the same as the trade deficit or the Treasury deficit, is now about as bad as it has ever been, and I can think of no peacetime circumstances when the fundamental features of the economy have ever been so bad, and had so little hope of sustained recovery. To blame the pound’s fall on the referendum is absurd.
.."tell how the average voter is to tell if their MP, a new candidate or a newly elected candidate is the 'right person'"
Alan Thomas, one only needs to discover if a person is an honest person. Honesty produces the best policies.
As for an MP.....it's already too late, most are dishonest, obviously.
A new candidate.....look and listen and do some research, obviously.
A newly elected candidate..... again, it is far too late.
Have I developed some form of truth test?
Yes....having discovered that what I had been officially taught throughout my childhood was invariably a pack of lies (thanks to my travels around the world) my prime objective from that first moment, and for the rest of my life, was to discover the truth in all things.
Practice makes perfect.
Posted by: Michael Wood | 16 October 2016 at 03:22 PM
"Violent and destructive raids on the countryside by destitute city-dwellers are described, as is a horrible descent on the Austrian city of Linz, by respectable persons turned into barbarian looters by the collapse of their world." (From a linked article)
We bought land - not much of it - thirty years ago imagining that we could see some sort of collapse coming. After all, the planet can't sustain present levels of consumption indefinitely, and what can't sustain won't sustain. It's a question of when, not if; perhaps in my lifetime, perhaps not. But I sometimes wonder how the transparently false, blatantly hypocritical virtue-signalers one sees on television and those one knows who thoughtlessly parrot their carefully rehearsed, vacuous drivel will act when they are hungry; - truly, gnawingly, desperately hungry.
Mass, non-selective immigration is justified in part on the basis that we need workers. Apart from the fact that it ignores the ranks of indigenous unemployed, it is predicated on the assumption that massive over-consumption financed by debt can continue forever - as if a dog chasing its own tail will never collapse in a gasping heap. Everywhere I look I see prime agricultural land going under houses and wonder, "Do these people know where food comes from?"
Land is wealth, not bits of paper. As our population density increases, the nation becomes inexorably poorer. We are sleepwalking to disaster while our leaders busy themselves pretending to worry about who the president of Syria is and prepared to take homicidal action to reinforce their pretense. I may yet see those brainwashed, politically correct, pseudo-liberal who'd-a-thought-it city dwellers descend on my potato crop like a pack of slavering wolves.
Posted by: Richard | 16 October 2016 at 05:59 AM
I can support the comment of SP about Crimea. I went there when it was still part of Ukraine for the 150th anniversary of the war and loved it. I thought Sevastopol was a lovely city and, though I've visited several countries over the years and spent six years out of Britain, that is the only place apart from the country I was born in that I felt that I could settle and live. I have really no idea why, it just was.
Posted by: Richard | 16 October 2016 at 05:08 AM
Mr Wood
Still not much light appears, I'm afraid.
Please, in a manner that lesser (and much younger - I fear this exchange might wander on for years at its present rate) mortals might understand, tell how the average voter is to tell if their MP, a new candidate or a newly elected candidate is the 'right person'. He/she will probably be 'right' for some but not for others, or might have changed their mind because circumstances have changed.
Have you developed some form of truth test, Mr Wood? If so, I should head off to the nearest patent office...
Your go.
Posted by: Alan Thomas | 15 October 2016 at 06:16 PM
What!
Try again, Mr Thomas?
Why, your answer is typical of the average Western folk's apathy that....
a).. fails to appreciate the basic concept of democracy,
b).. subsequently deserves the despot governments that have flagrantly helped themselves to your electoral rights when appointing themselves into office over lesser numbers discerning enough to be concerned about who they entrust with the awesome power of their democratic wealth.
Such apathy is inexcusable by merely offering a glib, "too busy with one's own life" when it is costing the lives and livelihoods of millions who fall prey to the greed and barbarism that it passively elects.
Could it be that it is you who should try again, Mr Thomas.
Posted by: Michael Wood | 15 October 2016 at 04:13 PM
Michael Wood
I'm not sure your reply helps at all.
Rightly or wrongly most of us for a party whose policies match most of our own. As to which candidates are honest or otherwise most of us - busy with our own lives - have little idea. Unless, that is, they've held the seat for years and we have lived in the same constituency for years. Apart from that, should one vote for an honest candidate even though you disagree with all/most of their main policies?
Please try again.
Posted by: Alan Thomas | 15 October 2016 at 02:12 PM
The Kondratiev wave is indicating that a dramatic economic downturn is in the offing. Since this downturn coincides with other wave downturns such as Schumpeter's, its effect will be greatly amplified. Stand by for gale - force economic winds soon enough.
Though this is disputed, it seems most likely that the Sub-Prime catastrophe was occasioned primarily by US government requirements, particularly Carter's regime, for Fannie Mae and Freddie Mac to lend to poorer people. In practice this meant high- credit risk people such as those whose sole income was social security.
Interestingly there was a BBC article recently about the red lining of areas which it said excluded Black people in particular from home ownership. Of course, these were the very areas which had the highest levels of home loan defaults. The BBC did not mention this however.
As it happens, red lining is a feature of Insurance in Britain. Premiums vary according to post code for a number of types of business such as home and motor insurance.
Another subPrime bubble is brewing in the US with automotive loans and there is serious defaulting on the enormous student loans book.
Posted by: Colin Broughton | 15 October 2016 at 01:26 AM
If the rumours are true and Qatar is about to pull the plug on Deutsche Bank, it will be interesting to see if Brexit gets the blame for the fall out from that too.
Posted by: Kevin 1 | 14 October 2016 at 11:28 PM
Alan Thomas...."Perhaps a clue as to where one should have voted...."
Are you telling me that you don't know if there's an honest candidate in your constituency?
Or is it that you haven't cared to find out?
That's the clue and I'm sure between us all we could whip up 650 good ones and true - if only we bothered.
Posted by: Michael Wood | 14 October 2016 at 09:49 PM
Alan Thomas...."Perhaps a clue as to where one should have voted...."
Are you telling me that you don't know if there's an honest candidate in your constituency?
Or is it that you haven't cared to find out?
That's the clue and I'm sure between us all we could whip up 650 good ones and true - if only we bothered.
Posted by: Michael Wood | 14 October 2016 at 09:49 PM
Unfortunately the Brexit flag is now being raised by businesses to cover all of their problems. There is a debt crisis in the EU economy that is slow burning, but will be crystalised by our departure.
As an aside, PH's suggestion of holidaying in the Crimea is a good one - I had a great time in Yalta exploring all of the historical sites.
Posted by: SP | 14 October 2016 at 08:20 PM
To faintly echo Michael Flanders 'a profit is not without honour except in your own currency'.
Posted by: Ken B | 14 October 2016 at 04:12 PM
‘But this is correlation, not causation’ writes Mr Hitchens, apparently forgetting to heed the words of the wise man who, in a different context, exhorted us always to add the important rider that it can still be jolly useful. Not only is Mr H an unlikely commenter on macroeconomics, I thought that he had actively once acknowledged that this was not an area of particular expertise.
Anyway, as others have pointed out, whatever the relative strengths and weaknesses of the British economy compared to Europa and America, the precipitous decline in sterling since 23 June is certainly largely due to post-Brexit uncertainties.
Posted by: Thucydides | 14 October 2016 at 02:06 PM
Michael Wood
"It's you!"
Not knowing who would 'rule our country safely, efficiently and honestly', I'm not sure if I'm one of the 46.4M voters who you accuse or not. Perhaps a clue as to where one should have voted in order to either shudder in shame or gloat in glory would set many a mind at rest.
Posted by: Alan Thomas | 14 October 2016 at 02:02 PM
There is only one cause of all the wars, woes and worthlessness of our beloved nation.
It’s the 46.4million eligible voters who did not put their cross alongside the right candidates to govern our country safely, efficiently and honestly.
It’s you!
Posted by: Michael Wood | 14 October 2016 at 11:47 AM
Since "brexit" has not yet happened -- and possibly never will -- it would be a pity if so much attention was distracted by currency fluctuations, immigration and other problems here and in the continental EU, that the furtively rigged CETA (Comprehensive Economic and Trade Agreement) treaty could be sneaked through below the radar.
That's essentially the same as the currently stalled TTIP arrangement but in this instance with Canada rather than the USA .... and any multinational corporation could take legal action against the EU, governments, organisations or individuals via a branch office (however small) in Canada.
But even if "brexit" became a reality, those who presently rule the UK would almost certainly sign up to such conspiracies (© Adam Smith, the free-market economist) against the public interest anyway.
Posted by: C. Morrison | 14 October 2016 at 11:33 AM
The flaw in this is that nearly all the major countries owe as much or more than The UK, notably Germany and France ( roughly 80% of GDP), The USA and most of all China. So why not devalue The Dollar Euro and Yen etc. in order to make it easier to borrow and pay off their debts Duh? Secondly 70-80% of UK Government debt is actually owed to British banks and other institutions ( who I would imagine borrow from sovereign nations!), I don't think they would take that sort of currency manipulation lying down. I would suggest that the Pound is falling because of perception and not substance, as nothing has actually happened yet! We are still in The EU, The City is still doing what it does and so is everyone else, more or less. When perception turns into reality, good or bad, We will have real answers soon enough, instead of all these political parlour games.
Posted by: Jim New London | 14 October 2016 at 11:06 AM
Mr Hitchens (and others) might find the article I have linked to above interesting.
It basically agrees with Mr Hitchens.
Posted by: Phil W | 14 October 2016 at 10:08 AM
HSBC is predicting a stock market crash soon. Brexit will probably be blamed for that as well.
Posted by: SB | 14 October 2016 at 09:58 AM
*** PH: Speculation over our future access to the single market could not possibly have led to the permanent devaluation of Sterling last June.***
Yes it could.
The valuation of sterling is partly based on market assessment of our future economic prospects.
Markets (by which I mean, anyone that buys and sells sterling) are worried that if we leave the single market then it will impact our ability to produce goods and services that people want. For example, our financial services sector could be impacted so that there might be less demand in the future for our financial services.
If that happens then there would be less demand for sterling for which to buy our goods and services. Hence the price of sterling would fall.
So markets are "pricing in" now this future lack of demand for sterling.
The referendum was the trigger, the lack of market confidence I describe above is the cause.
Here is your prediction in March 2013:-
"It looks to me as if the government has now decided to inflate its way out of the crisis. The new Governor of the ‘independent’ Bank of England has been given the nod that he may carry on with more ‘quantitative easing’"
i.e. you believed government money-printing would cause inflation ("to inflate its way out of the crisis")
I agreed with you at the time. So did other commentators (Liam Halligan springs to mind).
But it manifestly did not happen. Mystic Hitchens did not strike again. You were wrong. I was wrong. Inflation has been low ever since and is low today.
For you to try and claim three years later, when sterling is devalued by uncertainty over Brexit (currency devaluation is a different thing to inflation anyway), that you saw this coming is totally absurd.
Posted by: Phil W | 14 October 2016 at 09:37 AM
Yes, inflation hurts the lender and helps the borrower, by making debts smaller.
It also helps the home-producer over the importer because with inflation the pound is weaker abroad (making imports more expensive). When people import less they support home producers more.
And low interest hurts the saver whilst helping the borrower.
But a weak pound also helps foreign take-overs of British business (because it favours the foreign currency over the the domestic one), and so with a country that has no protection against foreign ownership (of business, land, houses, etc) is ripe for the picking.
So the current economy does indeed promote debt (by making borrowing more attractive than either saving or lending), and also foreign ownership, but it also promotes “made in Britain” over foreign imports.
Where it will go is anyone's guess.
Posted by: L Porter | 14 October 2016 at 09:24 AM
The referendum result will be blamed on everything that goes wrong with the British economy over the next goodness knows how many years ; there are those who actually want the economy to fail so they can be proved right, not thinking for a moment that if there are serious problems ahead, the poor will feel it first, longest and most ; the well off won't.
Posted by: TERENCE COURTNADGE | 14 October 2016 at 09:16 AM
The decision by Mark Carney to cut interest rates to 0.25pc and to print 60bn more pounds in August won't help the pound's value. What was the reason for this decision?
Posted by: SB | 14 October 2016 at 08:18 AM
"Competitive Currency" devaluation has been the vogue for the past ten years or so. If Germany lost the EURO and moved back to the Deutsche Mark, a large proportion of their export market would disappear over night. Japan has spent over twenty years trying to devalue its currency, to no material affect.
Countries such Spain, Portugal and Greece desperately need to revert to their own currencies, which would purchase far less overseas (and thus import less) but enable them to produce and export more at a profit (including higher profit margins). Britain can be included in this, we are still in the top ten exporters of goods, we just need to do more of it and a devalued currency will force the issue.
Posted by: Granville | 14 October 2016 at 07:49 AM
QE is devaluation. The weird thing is the result has been closer to deflation.
Posted by: Glenn | 14 October 2016 at 05:24 AM